My portfolio at the end of March 2020
Here’s the summary of my portfolio at the end of March. Please note that when I discuss company results, I almost always use the adjusted values that the companies give.
The previous month, February, was a wild month, thanks to the coronavirus scare, which became all the news, and caused the general market to have its worse month, and the Dow to have its worse day, since the 2008 Great Recession. My portfolio finished February up 23% year-to-date, while the market indexes were having this epochal fall, and were finishing the month averaging down 10% year-to-date.
Well, unfortunately, March turned out to be an even worse month, with the coronavirus “scare” turning into a really, REALLY, scary pandemic, which will kill a lot of people, and with the market and the economy tanking worse, much worse, than even in February. In fact in March the entire conversation was about the pandemic, making companies like Zoom and Crowdstrike stand out against the somber background. It was an awful month for the markets.
As often happens in times of high stress, I tend to sell my low confidence or try-out positions and concentrate my funds in my high confidence companies. That’s what happened this time too, and I am currently at just six stocks in my portfolio.
It seems to have worked, as my portfolio finished March up 13.4% year-to-date, while the market indexes were having another huge fall, and the five indexes finished the month averaging down 26.6% year-to-date, which unfortunately must have been catastrophic for many people. It almost seems miraculous to me.
That’s really a remarkable performance by our companies in a rapidly falling general market, and it goes against everything you’ve always been told, about how “overvalued” and “overpriced” stocks like ours would fall much faster than the “safer” stocks in a falling market.
Let me remind you that I posted multiple times in February that, while old economy stocks could have severe revenue loss from the current virus pandemic (retail, travel, hotels, concerts, theatre, manufacturing (supply chain problems, shipping to customer problems, and customers closing down of the duration of the epidemic)), our “wildly overpriced” SaaS companies would be seen as a safe refuge, as their revenue is recurring, and that Zoom especially might have a huge increase in revenue because almost all companies around the world are moving to video conferencing rather than travel and face-to-face meetings, because of the virus’ perceived danger.
MY RESULTS YEAR TO DATE
My portfolio closed this month up 13.4% (at 113.4% of where it started). And here’s a table of the monthly year-to-date progress of my portfolio for 2020.
**End of Jan +21.3%**
**End of Feb +22.9%**
**End of Mar +13.4%**
HOW DID THE INDEXES DO?
Here are the results year to date:
The three indexes that I’ve been tracking for years closed this month as follows.
The S&P 500 (Large Cap)
Closed down 21.4% YTD. (It started the year at 3231 and is now at 2541).
The Russell 2000 (Small and Mid Cap)
Closed down 32.1% YTD. (It started the year at 1668 and is now at 1132).
The IJS ETF (Small Cap Value)
Closed down 39.1% YTD. (It started the year at 160.8 and is now at 98.0).
These three indexes
Averaged down 30.9% YTD.
If you throw in the Dow, which started the year at 28538, is now at 21637, and is down 24.2%, … and the Nasdaq, which started the year at 8973, is now at 7502, and is down 16.4%, … you get down 26.6% for the average of the five of them YTD.
The market averages got killed in March!!! Clearly, picking stocks that will be winners, the way we do, has beaten investing in ETF’s and Indexes, and by huge amounts. We are not magicians. We just invested in great companies. Of course they are overvalued!
How often have we heard that no one can beat the indexes? That stock picking is a waste of time and effort? That we will all “return to the mean”? That books have been written that prove it? Well, guess what, Folks, the books are wrong!
And if you look at the past years you will see that picking our “overvalued” stocks has done enormously better than investing in cheap, or “value” stocks.
Again, my results are without using any leverage, no margin, no options, no penny stocks, no fancy stuff, just investing long in great individual companies. And I’ve told you each month what my positions are, and what proportion of the portfolio they are, so anyone who doubts it can check for themselves. And I’m no genius. Plenty of other people on the board have done about the same, and some even a lot better .
To simply state my goals, I’m merely trying to measure my performance against that of the average return for an investor in the stock market, and combining those five indexes should give a pretty good approximation.
ON WHAT’S GOING ON WITH OUR STOCKS
We aren’t investing in high capital expense, low margin companies, with high debt, that have to build factories or wrestle with supply chains in order to make things like automobiles, refrigerators, sneakers, and houses, all things that people can decide to just go another year or two with the old ones, or even companies that make microchips or tech appliances, where orders can totally dry up, and revenue can actually FALL.
Our companies are in the biggest wave of our time, the wave to bring all the enterprises of the world into the Cloud and AI. And they sell subscriptions to the software that enterprises use to run their businesses. This software saves their customers money, rather than costing them extra money. People may hold off on buying a new refrigerator in a recession, but no enterprise is going to pull out the software that it uses to run its business, and that is saving it money. Our companies may see their rate of revenue growth fall , but they are extremely unlikely see their revenue fall unless their customer companies go out of business. Right now everyone is in a panic about the coronavirus, and our companies are bound to be affected somewhat but it’s hard to see how they will be affected the way old economy companies will be affected. We’ll just have to wait and see.
”YOU CAN’T TELL ANYTHING IN THREE MONTHS!”
Yes, there are always the people who say you can’t tell anything in three months, so I thought I’d give you three years and three months.
In 2017, 2018, 2019, and the first three months of 2020, my portfolio was up 84.2%, 71.4%, 28.4% and now 13.4%. That comes out UP 360%.
In those same times, the market indexes were up 14.4%, down 8.5%, up 26.4% and now down 26.6%. That comes to DOWN 3% in the same time.
So in the three years and three months while our stocks were up 360%, the market as a whole went nowhere and was even down 3%.
Yes, intelligent stock picking DOES work!!!
LAST FOUR MONTHS REVIEW
December. I had said that I would never exit Mongo again because of FUD, only if their results warranted it. Well their last results warranted it as I saw it. Their rate of revenue growth dropped sequentially from 67% to 52% (since 52 is 78% of 67, that means their rate of revenue growth fell by 22% in one quarter). From two quarters ago sequentially it fell from 78% growth to 52% growth. That means it dropped by a third, 33%, in just two quarters. Their subscription revenue rate of growth also fell by 21% sequentially. Their operating loss worsened to $14 million from $8 million a year ago. Their adjusted net loss of $15 million was more than double their loss of $7 million a year ago. Their free cash flow loss of $13 million worsened from a loss of $10 million. And those were adjusted: Their GAAP net loss was $42 million! And worsening from $22 million! Everything was worse and going in the wrong direction.
Some smart people say that they are holding with a 5 to 10 year timeline because they know that Mongo will be a category killer and it will all turn out for the best. I’m too old for a ten-year wait so that’s not the way I invest. I look at what the numbers tell me now, and it’s not a pretty picture. I exited and put my money mostly in Crowdstrike and Datadog.
Datadog, which was in 2nd place a month ago at 16.5%, is now tied for 1st place with Alteryx, at about 20.2% of my portfolio, following the sell off in Alteryx for no known reason.
Crowdstrike, which was tied for 6th, 7th and 8th at 7.6% at the end of November, is now in 3rd place at 17.4%.
I also bought a tiny think-about position in Afterpay (less than 1%) which I’m not really ready to discuss yet, or to consider as an actual “position”. I’m still deciding if I will keep it.
January. It’s been a quiet month for me. There were no earnings reports on any of my companies. I trimmed my position in Alteryx a tiny bit when it went above 22%, but it just kept going up and I probably won’t trim again unless it goes over 24% or 25%. My Afterpay position, which was less than 1% at the end of the year, has now tripled to 2.8% and I’ve decided to keep it for now, but not grow it much barring an American IPO, because of the awkwardness, hassle, and extra cost of having to buy on the Australian market as an American. I didn’t add any positions during the month, or sell out of any positions during the month.
February started for me as another fairly quiet month, but it turned into the month of the coronavirus sell-off in the general market. I did very little until the big sell off seven to ten days ago. I sold out of my remaining small position in Zscaler after their disappointing earnings. I agree that they have a better solution, and they hired a great person to try to get them back on track, but they have structural differences (pretty much having to sell an entire business instead of land and expand), which will keep them from ever growing as fast as the other companies to which I moved the money, so why would I hold on and hope. I explain why I sold in a separate section below
I added to Alteryx at an average price of $140 even though it was already my largest position, to Crowd at $60.80, and to Datadog at $44.50, and to Zoom at $101, all during the meltdown a week ago Friday. This last week I added further to Zoom at $104, $106 and $108. I also added a tiny position in a new company that I’m still deciding about, and am not ready to discuss.
To raise money for these purchases, in addition to selling out of Zscaler, I sold back half of my small Afterpay positions, feeling that as a company focussed on clothing retail, while 2019 results, just announced, seemed great, their sales may be substantially below expectations during this next six month period (January through June of 2020), because of disruptions due to the virus. Fortunately I did it before their earnings release, after which they fell 10% on Friday. I also sold some Okta for cash to buy more Zoom, feeling that Zoom was a remarkable opportunity at present.
March continued to sell off because of the coronavirus pandemic. I finished selling out of Afterpay, see my reasons above which are based on the results I expect due to the virus pandemic. I added an enormous amount of Zoom, between $102 and $111, and a tiny bit above that too. I could see, from a myriad of sources that Zoom was going to explode upwards with people around the world working remotely.
I also added a lot also to my Crowdstrike, position after their amazing earnings report and conference call, but probably not quite as much as I added to Zoom. I made an atypical purchase and rapid exit from a tiny 0.5% position in Amcor, exiting because I wanted to buy more Crowdstrike and needed the cash.
To get money for some of these purchases I sold out of my Red Violet, not because I saw any bad news, but because a considerable part of their effort was selling to real estate salesmen and I thought there were going to be many houses shown in this kind of economic climate, and I had other companies that were knocking it out of the park, and on which I had more confidence. I finished selling out of Trade Desk, for the reasons I explained in my discussion of the stock in last month’s summary. It had been as much as 11% last August but in recents months was hovering at around 3% of my portfolio. I also reduced Coupa, after their runnup after earnings, for cash to buy more Zoom and Crowdstrike. I sold some Okta early in the month at about $127, but bought back later in the month at about $111 and $95, for a small net add. I added tiny amounts to Alteryx, and Datadog, during the month.
HOW THE INDIVIDUAL STOCKS HAVE DONE
Here’s how my current positions have done this year. I’ve arranged them in order of percentage gain. As always I’ve used the start of the year price for stocks I’ve been in all year, and my initial buy price for stocks I’ve added during the year. Please remember that these starting prices are from the beginning of 2020, and not from when I originally bought them if I bought them in earlier years (for example, I bought Alteryx originally at $27.72, over two years ago, but it’s listed below at an entry price of $100.07 because that is the price at which it started 2020.
**Zoom from 68.04 to 151.70 up 123.0%**
**Crowd from 49.87 to 58.79 up 17.9%**
**Okta from 115.37 to 121.05 up 4.9%**
**Coupa from 146.25 to 146.47 up 0.2%**
**Alteryx from 100.07 to 93.34 down 6.7%**
**DataDog from 37.78 to 34.55 down 8.5%**
As you can see, it wasn’t all due to Zoom. Four of my six stocks were actually up YTD in this horrible market, and the ones that were down were down small amounts, way less than the market.
As an aside, Zoom was up 12.4% at the end of January, and there were people who were sure that it was wildly overpriced then too.
Exited positions this year showing my gain or loss from the beginning of this year, or from when I first bought if it was during the year, and my average exit price. Please remember that these are from the beginning of 2020, and not from when I originally bought them if I bought them in earlier years.
**Zscaler from 46.50 to 54.00 up 16.1%**
**Afterpay from 20.50 to 17.00 down 17.1%**
**TradeDesk from 259.78 to 202.00 down 22.2%**
**Red Violet from $23.50 to $16.75 down 28.7%**
Please note that the last three of these were small positions, and two of them were almost trivially small, and they don’t represent a lot of turnover.
POSITION SIZES
As often happens at times of great stress and uncertainty, I sell off lower conviction positions and concentrate my funds in my highest conviction companies. This has brought me down to just six positions, which is very concentrated, but this is a time of great uncertainty. One of my positions has made a major change in the last month: Zoom, which was a 9% position at the end of January, and a 14% position at the end of February, is now in 1st place at 26.6%. That’s an extraordinarily sized position, but these are extraordinary times. The others haven’t moved much except that Crowd has moved from a 17% position up to a 21.5% position as is in 2nd place currently. Keeping the number of my stocks down really makes me focus my mind and decide which are really the best and highest confidence positions.
Here are my positions in order of position size, and bunched by size groups…
**.**
**Zoom 26.6%**
**Crowdstrike 21.5%**
**Alteryx 17.9%**
**Datadog 16.8%**
**Okta 12.2%**
**Coupa 7.3%**
STOCK REVIEWS
All six of these stocks all announced quarter and fiscal year end results in February or March. They were beyond excellent.
ZOOM has moved up to 1st place at 26.6% of my portfolio (up from 9% two months ago, and 14% last month). It started the year at $68 and is now at $152. That’s a much larger position than I’m used to having, but Zoom is a company that just had an existential event change its entire world. It has gone from being a rapidly growing and successsful little company that most people had never heard of, to the company probably most talked about in the world, in a month or so!!!
I’m sure that you’ve been reading the same things I have… All of a sudden people are talking about people homebound from the US to Holland having parties on Zoom, and about the British Cabinet having their last Cabinet Meeting on Zoom, and about other people talking about their nine year old kids getting a paying Zoom account, and about Zooming with friends back home in the Czech Republic from The US, and about their congregation using Zoom, and about grade schools using Zoom, and about universities from California to Harvard using Zoom, about Zooming with stuck-at-home family and friends on Zoom, and about homebound employees of enterprises using Zoom, and the CEO of Crowdstrike says that he and his head of sales will have 100 meetings in 100 days, with customers and hoped-for customers, on Zoom, and on and on…
At one point I said there are probably four times as many users now as there were at the end of December, but do you realize how MUCH of an UNDERESTIMATE that is? Just think of all those grade school and high school and college kids who are suddenly using it, and religious congregations using it, and businesses like Crowdstrike, and people partying on Zoom, and talking to relatives and friends on Zoom when they are stuck in their homes, Foolchandra posted about a law firm having its first mtg of 68 partners on Zoom and deciding that it was so much better than in-person meetings that they decided to continue with Zoom even after normalcy returns, etc, etc… There may be eight or ten times as many users now as at the end of December! Obviously they won’t all stick, but Zoom being the go-to name for video conferencing and video communication will stick!
I think that perhaps Zoom could grow revenue 200% this year (triple it), or more. They were probably going to grow by 80% without all this!!! So that isn’t quite so crazy.
Here are the results of Zoom’s January quarter, which was announced in March (this month).
“We delivered a unique combination of high total revenue growth of 78% at a scale of $188 million, adjusted operating income of $38 million, and operating cash flow of $37 million. Our execution also drove 61% growth in the number of customers with more than 10 employees, and 86% growth in the number of customers contributing over $100K of revenue.”
Total revenue of $188 million, up 78%
Adj operating income was $38 million, up 292% from $10 million a year ago.
Adj operating margin was 20%.
Adj net income was $43 million, up from $10 million.
Adj EPS was 15 cents, up from 4 cents
Cash was $855 million.
Operating cash flow was $37 million up 129% from $16 million
Free cash flow was $27 million up from $6
Customers with more than 10 employees was 81,900, up 61%
Customers contributing more than $100,000 were 641, up 86%.
Net dollar expansion rate in customers with more than 10 employees was over 130% for the 7th consecutive quarter.
Remaining Performance Obligation (RPO) is $604 million, up 94% from $312 million [Saul here: That’s almost as much as this whole year’s revenue!!!]
Conference call
We closed Zoom Phone deals with 2,900 customers with more than 10 employees.
We signed up Johnson and Johnson and VMWare.
Okta highlighted Zoom as a preferred video application, and said Zoom had 876% growth in the Okta network over the past 3 years!
[Saul here: The CEO of Crowdstrike also talked about Zoom as if it was the obvious choice, as did the ex-CEO of Cisco].
In Gartner Peer Ratings, Zoom received the top overall rating in the “Voice of the Customer” category.
Revenue exceeded the high-end of our guidance by $12 million
Adj gross margin was 84%, up from 82% and from 83% sequentially. Due to the coronavirus, we have seen significant usage of our platform and we will expand our capacity to meet the increased demands of both paid and free users. Next quarter we believe our gross margins will thus be closer to 80%.
In the quarter, we did not see any impact yet from coronavirus, but we have definitely seen an up tick in usage since. But a lot of that is on the free side. So it’s too early to tell whether or not that’s going to convert long-term into paying customers. As we mentioned, we are seeing impact and we continue to build capacity to ensure that we can support this increased usage. So we are seeing impact on our gross margins, which is why we’re guiding you towards the lower end of our range for next year.
Saul: This was obviously a terrific quarter. I’m also impressed that Zoom is so profitable at such an early stage. Yes, I know that there is a lot of argument about whether or not they have a moat, but they will have enormous growth this year, because enterprises all over the world will be looking to cut down on all travel to meetings, and using video conferencing instead, and because Zoom is simply better at video conferencing than anyone else. Given that videoconferencing instead of travel and hotels will save enterprises gobs of money, as well as avoiding risk, I just don’t see enterprises hesitating to pay a little more for the best.
ALTERYX is at 23.6% of my portfolio, and in 3rd place. It announced December quarter results in February, and they were enormous, with revenue growth accelerating both year over year and sequentially to 75%, the highest I’ve ever seen them. That was up sequentially from 51% in March, 59% in June, and 65% in September! That’s just incredible! And their stock price has fallen in the coronavirus panic from $139 at the end of last quarter to a low of $81, and is now just back up to just $93 now. Does that make any sense to you?
Their revenue percentage growth looks like this:
**2016: 57 67**
**2017: 61 50 55 55**
**2018: 50 54 59 57**
**2019: 51 59 65 75**
As you can see, it looks solid as a rock.
Their adjusted gross margins were 90%, 91%, 92%, and 93% for the last four quarters!
Their dollar based net retention rate has been 130% or more for the last thirteen quarters!.
For a few other figures:
Adj op income was $51 million up 93% from $26 million a year ago.
Adj net income was $44 million up over 100% from $21 million.
Adj net income margin was 28% !!!, up from 24% a year ago.
Adj EPS was 64 cents, up 100% from 32 cents
Total Shares were up just 5%
Cash was $975 million.
Op cash flow was $21 million up from $14.4 million a year ago.
What they do is to enable non-techies and techies to quickly and easily analyze data. Their clients therefore love them. Management feels they have no competition. From one of their earlier conference calls: “We are in a space where there’s little to no competition and a much larger TAM.”
We’ve had some discussion on the board about whether Alteryx is really a SaaS company, since it’s not on the cloud, and whether or not it really matters as its revenue is recurring and its net expansion rate is 132%.
Their long term goals are:
Gross margin 90-92%
Operating Margin 35-40%
FCF Margin 30-35%
They recently announced a new collaboration to work on Smart Cities.
The stock finished 2018 up 135% yoy, and they were up 68% in 2019 on top of that, in spite of the big sell-off. They hit a low during the sell-off of about $87, and they have now bounced about 60% off that low, to about $139. I feel very justified in calling Alteryx a Category Crusher, with very high confidence level. I’d give it six confidence stars out of six. It seems to control its space and is growing like mad.
DATADOGis in 4th place at a 17% position. Let me tell you a bit about this company: It is a SaaS software company that leases subscriptions to software that monitors infrastructure, analyzes application performance and provides log management. Recently it has added new products that provide what it calls experience monitoring (what the experience of your customers is), and a network performance management product.
What makes it unique is that its competitors have single products that work in silos, while Datadog integrates them all and its “three pillars of observability can be observed on a single pane of glass.” As Bert says, “DataDog built a product that is self-serve in nature and can be installed in minutes. And having a platform that offers all the monitoring, and the analysis of logs, in a single platform is more unique than you imagine.” And that ability users have to look at their entire IT operation holistically and on a single pane of glass is a great differentiator.
Here are the results of their December quarter:
Revenue grew 85% to $114 million. (Note that it’s ALL subscription revenue). The scuttlebutt was that their growth would be down to 30% or 40% this year.
GAAP Gross margins were 77% from 74% a year ago.
Adj operating income was $7 million,
Adj operating margin was positive 6%, improved from NEGATIVE 7% a year ago
Operating cash flow was $24 million, up from $4 million sequentially,
Free cash flow was $1 million, up from $(3.7) million sequentially (due to real estate capex expenses).
Customers over $100,000 at 858 up 89% from 453 a year-ago
Customers over $1 million at 50 up 72% from 29 a year-ago
They are currently “In Process” on the FedRAMP Marketplace, initiating the certification process.
Announced Security Monitoring, currently available in beta, to break down the silos between security, dev, and ops. Our vision is to offer security teams the same visibility into their infrastructure, network, and applications that developers and operations teams have.
Announced the general availability of Network Performance Monitoring (NPM). Our Simple Network Management Protocol (SNMP) integration, a component of NPM, is available in beta and extends visibility to physical network devices.
Announced the general availability of Real User Monitoring (RUM). An extension of our user experience monitoring suite, RUM provides real-time visibility into the experience of individual users, in order to quickly spot and correct otherwise costly website performance issues.
All new products are available in the same tightly integrated platform.
Launched the Datadog Partner Network, a new program expanding Datadog’s support for channel partners.
Continued product innovations, including enhanced APM functionality, deeper visibility into containers and serverless environments, and enhanced machine learning capabilities.
Conference Call (greatly edited, paraphrased, and summarized)
This quarter was a great finish to a milestone year for us. Revenue was $114 million, up 85% We ended the year with 858 customers with ARR of $100,000 or more, up 89% yoy.
About 60% of our customers are now using two or more of our products, up from 25% a year ago. Penetration is relatively even across enterprise, mid-market and SMB segments. Additionally, about 25% of our customers are using all three pillars of observability, which is up from 5% a year ago. This is especially impressive considering that our third pillar, Logs, has been available for less than two years.
Our net retention rate continued over 130% We also continue to be capital-efficient with free cash flow of $11 million.
For the full-year, we generated revenue of $363 million, up 83%, and free cash flow was positive $0.8 million for the year.
We added about 1,000 new customers in Q4, which is a record and almost twice the number we added a year ago.
We accelerated our pace of innovation with multiple exciting developments in Q4. We are pleased with the initial uptake of NPM and RUM, which demonstrates our opportunity to create future revenue drivers for our business.
We also announced security monitoring, as a first step to apply the power of our platform beyond observability use cases. We envision a future where silos continue to break down beyond dev and ops and extended security teams.
As it becomes clear that securing applications in the cloud world needs to involve all three. We believe that by harnessing the massive amounts of data we already collect we can improve our customer’s IT security.
Finally, one of the greatest surprises to us this year has been the success of initial land deals. In 2019, approximately 65% of our new logo deals had two or more products, up from only about 25% in 2018. This demonstrates the pent-up demand for our integrated platform and our ability to add value from the very start of a customer relationship.
To summarize, we believe we have a very significant opportunity to further expand our product portfolio. Investing in innovation is a core part of our business strategy.
Now, let’s move onto marketing. We have been expanding coverage in both commercial and enterprise channels to capture the opportunity across company sizes. While continuing rapid growth in North America, we are also expanding in new and existing territories internationally.
Additionally, we have been building a government-focused team. And finally, we are investing in the partner channel, with the launch of the Datadog Partner Network.
As of the end of the quarter, we had about 10,500 customers, up from 7,700 a year ago. We added about 1,000 customers in Q4, a record for us.
We ended Q4 with 858 customers with an ARR of $100,000 or more, up 89% from a year ago, up more than 130 in Q4. Given that more than 70% of our ARR is generated from customers over $100,000, we expect this cohort of customers to be a large driver of our future growth. We also ended the year with 50 customers with ARR of $1 million or more, which is up from 29 a year ago, and only 12 two years ago.
As a conclusion, we are in the early stages of what we think is a tremendous market opportunity, which we believe we are well positioned to capture. We have been performing at a very high level and our focus is on doubling down on what has made us successful today.
So in 2020, we plan to continue to invest in hiring great engineers and delivering innovation to our existing and new customers. We also remain committed to investing in our go-to-market, expanding our sales capacity globally across all geographies, as well as investing in new opportunities such as a partner channel in public sector.
CFO - I’m happy to report that the average ARR of our enterprise customers at the end of 2019 was about $230,000, an increase from $160,000 at the end of 2018. And average ARR of our mid-market customers at the end of 2019 was about $170,000, an increase from $110,000 at the end of 2018. We believe there remains ample room for continued penetration of each of these segments.
Lastly, international growth outpaced total growth. And many of these international teams are still ramping.
Gross profit in the quarter was $88.4 million, representing a gross margin of 78%. This compares to a gross margin of 76% last quarter and 75% in the year ago period.
Net income in the quarter was $10 million, or 3 cents per share, on 327 million weighted average diluted shares outstanding. Profitability outperformance was driven primarily by the revenue outperformance.
We have a highly efficient business model and have experienced a high return on our investments in S&M and in R&D. While we have operated around breakeven to slightly profitable and outperformed on profitability in Q4, we see ample opportunities to continue to invest in the large market opportunity ahead of us.
Turning to the balance sheet and cash flow, we ended the quarter with $778 million in cash
Op Cash Flow was a positive $17.4 million in the quarter and a positive $24.2 million for the full year.
After taking into consideration capital expenditures and capitalized software,
free cash flow was positive $10.9 million in the quarter and approximately breakeven or around $800,000 for the full-year.
We are very pleased. We have growth at scale that few can match and have demonstrated efficiency in our model. We are making continued investments for growth for the foreseeable future. We believe we are at the very early stages of a multi-billion dollar market opportunity and we feel very good about our ability to build a large and successful company over time.
CROWDSTRIKE has moved up to 2nd place at 21.5%. It has been as high as $96, and hit a low of $33 in the panic and is now about $59, so while it is up substantially from that low, it is still way down from its high in spite of the enormous, blow-out Jan quarter results that were announced in March and which you are about to read about. (I posted them on the board as well)
Let me start with a few paraphrased quotes from the CEO:
The competitive landscape is the best I have seen in my 27-year career. We believe this is the beginning of a multi-year trend as being driven by the industry consolidation that took place last year along with the seismic shift to cloud technologies.
We are landing bigger with more modules and increasing the number of new customers that start with ARR over $1 million.
With our cloud native platform, our lightweight agent that is easily deployed at scale, and our frictionless go-to-market engine, we are uniquely positioned to meet their cybersecurity needs
The seismic shift to cloud native technologies and cloud workloads has created an environment with massive greenfield opportunities. While our competitors are distracted trying to integrate acquired technologies, rationalizing their workforce or retooling their on-prem offerings, our mission, platform and brand are clearly resonating with customers and partners.
Furthermore, as Broadcom began integrating Symantec, we saw an increase in inquiries among both customers and partners. These dynamics have contributed to an expansion in our pipeline. We have seen significant demand as our partners try to protect customers who are left searching for alternatives as Symantec abandons large segments of the market. Several partners have launched Symantec replacement campaigns. We are closely collaborating with them. One of our partners submitted a list of several thousand of their customers that will be migrating away from Symantec in the next year and we found that there was very little overlap between these prospects and our existing customer base.
Saul here: while other companies brag about increasing their number of customers by 30% per year, Crowdstrike increases there by over 100%.
Within new enterprise customers, we are landing bigger with more modules and in this quarter we more than doubled the number of new customers starting out with greater than $1 million of ARR compared to a year ago. Additionally, across all new customers, the average number of modules increased every quarter this past fiscal year.
We also continued to expand module adoption within our existing customer base. This quarter, the percent of our customers with four or more modules once again increased, and those using five or more cloud modules grew to one-third of our customer base.
As we add new modules after the first module is sold to a customer, virtually every other module after that is pure gross margin!!!
Saul here: they also point out that companies using more of their modules obviously deepens their relationship with the companies and makes them more sticky.
As far as the impact of the coronovirus, Crowd was built to thrive with a remote workforce. Even in normal times 70% of their workforce is remote. They use Zoom.
Also as their customers and potential customers have more and more people working remotely they need more end point security. Crowd has seen a 13% increase in initial appointments since the pandemic. The people their salesmen need to contact aren’t so busy in the office, but are at leisure, more or less, at home and more willing to take time and talk.
They point out that they are all in the cloud while with the pandemic it’s even harder ard to set up these on-premise systems that their competitors have, and especially to service customers whose people are working remotely.
Now quarter results, very summarized
ARR was $601 million, up from $313 million a year ago, and from $502 million sequentially. It was up 20% sequentially, which was up from 18% sequentially the quarter before, which was up from 16% sequentially the quarter before that. In other words it was reaccelerating.
Revenue was up 89%. Subscription revenue was up 90%, and was 91% of revenue.
Now the GOOD stuff:
Subscription gross margin was 77%, up from 70% a year ago.
Operating Cash Flow was $66 million, up from $16 million a year ago. (That’s not a misprint). Operating cash flow margin was 43% !!!
(For the year it was $100 million, improved from a LOSS of $23 million a year ago)
Free Cash Flow was $50 million, up from $0 million a year ago.
Free Cash Flow margin was 34% !!!
Net Profit Margin was -3%, improved from -35% a year ago!!!
Growth in subscription customers was 116% !!! In fact, January fiscal year-end customers in 2016 thru 2020 were
**165**
**450**
**1242**
**2516**
**5431**
Just look at that! In four years they went from 165 customers to 5431 customers. That’s about a “33-bagger” in four years! In two years they went from 1242 customers to 5431. That’s more than a quadruple in two years!!! People obviously want and like what they are selling.
And this company is still way off its high! You can see why I was trying to buy all I could.
OKTA in 5th place, is a 12% position, and is at a five star confidence level. It was up 81% in 2019, and is over a quadruple since I bought it over two years ago. What Okta does is control individual sign-on to all the apps you use using a native cloud SaaS platform. It’s called identity and access management. It is loved by the people who use it, because they no longer need a million passwords for each program they sign on to. They do a lot more than smart sign-in, more than I can understand for sure. It’s also very sticky and unlikely to be replaced. At the bottom of this meltdown it got as low as $96 and it’s now at $121.
It announced January quarter results in March. They were excellent. Not like Crowdstrike (nothing can be like Crowdstrike’s report), but excellent all the same:
We’re still in the early days of a massive addressable market to modernize identity for the workforce and customers and we are in the leading position to capitalize on the opportunity for many years to come."
Revenue was $167 million, up 45%.
Subscription revenue was $158.5 million, up 46%.
Remaining Performance Obligations (RPO) was $1.21 billion, up 66%. Current RPO, which is subscription revenue expected to be recognized over the next 12 months, was $592 million, up 54%.
[Saul Here: Just look at that! RPO of $1,210 million and Subscription Revenue of $158.5 million. They have almost eight quarters of current revenue in the bag already! That’s astounding!]
Total calculated billings were $225 million, up 42%.
Adj operating loss was $5.6 million, or 3.3% of revenue, improved from $4.9 million, or 4.3% of revenue, a year ago.
Adj net loss was $1.7 million, improved from $4.4 million a year ago.
Adj EPS was a loss of 1 cent, improved from a loss of 4 cents.
Operating cash flow was $25 million, or 15% of revenue, up from $10 million, or 9% of revenue, a year ago.
Free cash flow was $18 million, or 11% of revenue, compared to $5 million, or 4% of revenue, a year ago.
Cash was $1.40 billion.
Conference Call
Another fantastic year for Okta. Quarter revenue grew 45%, subscription revenue grew 46%, RPO grew 66%, and we had record operating and free cash flow.
Addition of a record 142 customers with over $100,000 in the quarter. Over half of these additions were from new customers. The total of $100,000 customers is now 1,467, up 41%. These large enterprise wins are from a wide range of industries.
With the adoption of zero trust environments, the traditional security perimeter has dissolved and identity is now at the heart of the new security setup.
The robust growth in total RPO reflects our continued success with large enterprise customers. These contracts tend to be larger in value and longer in length. For example, our transactions with a total contract value of $1 million or more, grew over 80%, and the weighted average term lengths of those contracts is nearly four years, which is 50% longer than our overall average term length.
Our dollar-based net retention rate was 119%, up 2 points sequentially. The increase was driven by strong customer upsell, particularly with our enterprise customers, as we grow our business within the world’s largest organizations.
We are adding headcount across the board, primarily in our S&M and R&D teams. We’ve been successful in attracting and retaining great talent and total headcount grew 44% to over 2,200.
Right now we’re not seeing any impact in our product demand from coronavirus. We’re obviously going to monitor that very closely.
The demand environment and the market environment for our products is very, VERY robust. There’s more deals, there’s bigger deals, there’s – you know, our product seems to be really positioned in the right place and the right time. And we haven’t seen the competitive environment change. It’s really been consistent over the last several years.
What’s exciting for us as we move more and more into the large enterprise, is that we have the opportunity for large initial deal sizes, but we also have a lot more opportunity for expansion into those customers over time. And that’s really what drove the increase in the net retention rate.
We’re really, really focused on making our customers successful. So it’s one thing to get a company, but you know, even companies that have fairly large initial deals with us, our product portfolio is getting to a point where they can substantially expand. So that’s why our long-term orientation to really be obsessive about making the customer successful and turning them into fans is starting to pay off. It’s, you know, things are really rolling.
We’re going to continue to focus on hiring to capitalize on this huge market opportunity we see in front of us.
We are landing larger and larger enterprise customers with larger initial deal sizes, and not only that, but we had really big expansion into those large customers. And that’s really what our focus is going to be going forward.
If you just look at the number of organizations that we could potentially penetrate, I mean, it’s hundreds of thousands of them. So we’re very happy and fortunate with our almost 8,000 enterprise customers adding 550 a quarter, those are great results. But we’ve got a huge opportunity in terms of net new accounts that we can work with and how far we can get penetrated inside those accounts.
COUPA is now in 6th place at 7% of my portfolio. Its low during the meltdown was $110, and it’s now at $146.
It announced January quarter results in March. Here they are:
Our uniquely comprehensive Business Spend Management platform delivers value and savings to our customers by providing visibility, compliance, control, and automation. Our record annual revenue of $390 million and quarterly revenue of $111 million, along with record operating and free cash flow performance are just a few of the financial results that reflect the real, measurable value being unlocked by Coupa.
Quarter results
Total revenues were $111.5 million, up 49%.
Subscription revenues were $98.6 million, up 46%
Billings were $181 million (or 62% more than total revenue)
Adj gross margins were 73%
Subscription margins were 81% (and services margins were 10%)
Adj operating income was $13.3 million, up from $2.4 million, and it was 12% of revenue.
Adj net income was $15.0 million, up from $3.4 million
Adj EPS was 21 cents, up from 5 cents.
Operating cash flows and free cash flows were positive $22.3 million and $20.2 million, respectively. That gives margins of 20% and 18% respectively.
Cash was $767 million
As you can see those were very good results, and the stock rose about 15% the next day.
THE OUTLOOK FOR THIS YEAR
This last quarter the average growth rate for my six stocks, which make up all of my portfolio, was 70%. (If you don’t believe me, calculate it yourself). Even if they slow down more than I expect, it’s hard to see the six companies with an average revenue growth rate of less than 35% to 40%, especially since Zoom and Crowdstrike are two of the companies. So I would guess that that may make make our companies very desireable to any mutual fund or hedge fund portfolio manager who wants to show good results for the year.
FINISHING UP
I feel that most of my portfolio is made up of a bunch of great companies. But that’s just my opinion, and I can’t say often enough that I’m not a techie and I don’t really understand what most of them actually do at all ! I just know what great results look like. I figure that if their customers clearly like them and keep buying their products in hugely increasing amounts, they must have something going for them and, as I’ve often said, I follow the money, the results. And I listen to smart people about the prospects of these companies.
When I take a regular position in a stock, it’s always with the idea of holding it indefinitely, or as long as circumstances seem appropriate, and never with a price goal or with the idea of trying to make a few points and selling. I do, of course, eventually exit. Sometimes it’s after months, and sometimes after years, but I’m talking about what my intention is when I buy.
I do sometimes take a tiny position in a company to put it on my radar and get me to learn more about it. I’m not trying to trade it and make money on it, I’m just trying to decide if I want to keep it long term. If I do try out a stock in a small position and later decide that it’s not what I want, I sell it without hesitation, and I really don’t care whether I gain a dollar or lose one. I just sell out to put the money somewhere better. If I decide to keep it, I add to my position and build it into a regular position.
You should never try to just follow what I’m doing without making up your own mind about a stock. In these monthly summaries I’m giving you a static picture of where I am currently, but I may change my mind about a position during the month. In fact, I not infrequently do, and I make changes in the position. I usually don’t announce these changes until the end of the month, and if I’m busy or have some personal emergency I might not announce them even then. And besides, I sometimes make mistakes, even big ones! Don’t just follow me blindly! I’m an old guy and won’t be around forever. The key is to learn how to do this for yourself.
THE KNOWLEDGEBASE
Since I began in 1989, my entire portfolio has grown enormously. If you are new to the board and want to find out how I did it, and how you can try to do it yourself, I’d suggest you read the Knowledgebase, which is a compilation of words of wisdom, and definitely worth reading (a couple of times) if you haven’t yet.
A link to the Knowledgebase is at the top of the Announcements panel that is on the right side of every page on this board.
For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially:
How I Pick a Company to Invest In,
Why My Investing Criteria Have Changed,
Why It Really is Different.
Illogical Investing Fallacies
I hope this has been helpful.
Saul
But nothing that can’t be corrected.